| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
Despite the surprise in the index and the relatively high inflation in the past year, we do not think we will see any signals from the Bank of Israel about raising interest rates any time soon.
| Inflation rose to 2.8% at the end of 2021, the highest since the protest in the summer of 2011
After 2 lower-than-expected indices, December was higher than expected and rose 0.3 percent. A significant increase was recorded in the housing section (0.8%), about half of this in light of the increase in the purchase tax.
As a result, it rose to 2.8 at the end of 2021, the highest since the protest in the summer of 2011. As in recent years, the housing clause was the main contributor to inflation alongside prices of fuel (oil surge), cars, food (rising commodity prices) and more. The rise in prices was partially offset by the strength of the shekel.
Our initial forecast for the January index is unchanged (declining prices due to morbidity versus rising food prices also due to beverage tax), plus 0.2 percent in February (sharp rise in electricity and fuel prices).
Our forecast for the next 12 indices has risen to 1.9 percent amid prolonged delays in global shipping (after the Omicron “landed” in China) and rising oil prices. However, this forecast is still significantly lower than the expectations derived in the capital market.
Despite the surprise in the index and the relatively high inflation in the past year, we do not think we will see any signals from the Bank of Israel any time soon, in contrast to other central banks. This is due to the strength of the shekel and inflation expectations that are well anchored within the Bank’s inflation target.
In our opinion, the “key” in looking ahead is in the housing index that has accelerated in the last two months, partly as compensation for 2020. If we see a continued increase in the coming months, then the Bank of Israel will have to reconsider its policy and perhaps bring interest rates up.
| Apartment prices will continue to rise this year, but at a more moderate pace
Not only has inflation risen at the fastest pace in about a decade, but housing prices have risen by 1.4 per cent (between mid-October and mid-November) and cumulatively by 10.6 per cent in the last 12 months. A sharp rise in construction input prices (0.2 percent in December and 5.6 percent in the last 12 months) also contributed to the rise.
In this index, we anticipate a moderation this year in light of the halt in the rise in raw material prices (and a decline in some commodities), and the expectation of a boom in the Chinese real estate market, bottlenecks in industry and global shipping.
This year we expect a continued rise in apartment prices but at a more moderate pace. On the supply side of the apartments, there is an increase in the pace of planning, but the prolongation of construction (also due to a shortage of skilled workers) and bottlenecks in industry and shipping are delaying the actual completion of construction.
On the demand side, low interest rates continue to support, but less compared to the last year and a half in light of the increase in purchase tax, additional tax proposals and the expectation of global interest rate hikes that will translate into mortgage interest rates.
This is noticeable in the US where for 30 years it has risen significantly in the last two months as a result of the rise in government bond yields. As a result, the U.S. residential housing market is expected to grow at a more moderate pace compared to the past year and a half.
| US: Inflation has risen fast and will fall slowly, interest rates have fallen fast and will rise fast?
The US continued to rise to 7 percent in December, the highest level in about 40 years. About half of that is due to rising energy prices and global shipping disruptions, so we expect a moderation in inflation in the second half of the year.
At the same time, in the last two months there have been more half-wages and price increases in the rental section, which led the governor and others in the central bank to signal for the first time already in March.
We believe that next Wednesday on that, a scenario that is already embodied in the capital markets. At the same time, we do not believe that the bank will accelerate the rate of interest rate increase beyond what is embodied in the market today due to the negative impact of the disease waves and the lack of a budget.
| Strong exports disguise the slowdown in China
The corona has accelerated the consumption of physical products in the world in the last year and a half, when the possibilities of consuming services have shrunk. The main beneficiary of this is China and this is reflected in data that broke records in 2021 with about $ 3.4 trillion (340 billion in December).
In the last quarter of 2021 China slowed to 4% (compared to the same quarter in 2020) as export growth compensated for the weakness in the last six months in other industries, especially residential real estate and services industries that suffer from the government’s zero tolerance policy towards the corona.
Thus, it slowed significantly in December to only 1.7 percent in the last 12 months, a weaker figure than expected.
The slowdown caused China’s central bank to intensify its expansionary policy and following the publication of growth data, the bank introduced liquidity to the markets and reduced it by 0.1 percentage point to 2.85 percent, the first reduction in interest rates since April 2020.
Despite the expansionary policy, the factors we listed earlier will continue to obscure the growth in 2022, which we estimate will fall to 5 percent, lower than the rate we have become accustomed to in recent years. Which will push down world commodity prices.
The author is the head of the Economics and Research Division at Harel Insurance and Finance. The author (s) and / or members of the Harel Group and / or interested parties in them and / or the controlling shareholders of the Group, may hold and / or trade, for themselves and / or for others, the securities and financial assets specified in this review. This review should not be construed as investment marketing or an alternative to investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the opinion of the author at the time of publication, and this may change at any time and without further notice. The Company will not be liable, in any form, for any damage and / or loss caused, if any, as a result of relying on this review, nor does it warrant that relying on the information contained therein may yield profits.